MorningWord: 4/13/12

by Dan April 13, 2012 9:10 am • Commentary

MorningWord: 4/13/12: Yesterday’s market breadth was fairly impressive when you consider the lack of participation by AAPL, notching it’s 3rd consecutive lower close.  In the last 2 trading days, the SPX has nearly recovered 50% of it’s losses since making a new 52 week high on April 2nd, which seems like a fairly reasonable re-tracement as we head into the think of what will be a very crowded earnings reporting period, and likely to be very instructive for the potential of the continuation of the year to date rally.

10 day SPX chart from Bloomberg

One of the big stories overnight was that China’s reported GDP for last quarter came in weaker than expected at 8.1%, vs 8.9% last year, but this is not a huge surprise as expectations had been lowered last month.  The Shanghai Composite closed up about 35 bps while the Hang Seng raged up 1.8% as investors feel the likelihood of monetary easing to help re-invigorate growth which likely aid equities.

The main focus of the next few weeks will be earnings guidance for Q2 and while Q1 beats will likely grab the headlines, the quality of the beats and the earnings visibility going forward will be the key to the continuation of the rally.  We are likely to continue to see many cross currents, where U.S. companies who are largely exposed to North America should be somewhat insulated to slower sales in Europe and possibly even China, and face less headwinds from a relatively stronger dollar.  The chart below of MCD vs CMG, MCD gets more than 60% of sales overseas vs CMG which gets 100% from N. America.  This divergence could continue to hold for a bit as fears of European sales weakness for companies like MCD could derail it’s ytd performance.

With the DAX down 70 bps as I write at 9:10am, and our futures only down 40bps, I would be careful pressing shorts on the open here…..JPM and WFC both beat and it will be interesting to see how investors digest the commentary on their conference calls.  JPM is up about 1% in the pre-market and WFC is practically unchanged, I will keep a close eye on the ability for these 2 strong performers to hold gains today. This will be the “Tell” for the market in my opinion.


MorningWord: 4/12/12:  I’ll be brutally honest, it’s been a little hard for me to concentrate much on the markets for the last 16 hours since meeting one of the all time greats in rock n’ roll last night on the set of Fast Money, Bob Weir of the Grateful Dead.

Me, My Sister Stacy and Bobby


But let’s give it a shot.  Yesterday’s bounce of about half of the previous day’s losses was  generally unimpressive with the breadth fairly week.  The chart below of Bloomberg’s Composite New 52 Week High Index showed and anemic reading of 80, levels not seen since the little early March sell off, and just a tad above the readings we saw during much of last summer and fall.  This is not exactly that surprising given the fact that the broad market was down for 4 days prior to yesterday, but something to keep an eye on today as it appears we are going to be up on the opening.  

[caption id="attachment_10477" align="aligncenter" width="300" caption="Bloomberg's Composite 52 Week High Index"][/caption]


I guess when speaking of Breadth yesterday it is important to note that the broad market generally went sideways after gapping up on the open nearly 1%, but closing at the lower end of the daily range, but Bulls will point out that it did this with AAPL closing down on the day.

With Sovereign debt yields in Spain and Italy the focus this week I think it is important to keep an eye on the banks, Specifically DB as a proxy for European banks, but also our banks to see if they hold Wednesday’s lows as we head into WFC and JPM earnings tomorrow morning.

One other interesting observation from yesterday is that the VIX closed on the highs of the days range above 20 on a day that saw the SPX open on the highs and close up, but near the lows of the days range.  The chart below displays this inverse relationship and I think worth keeping an eye on especially on up days.

[caption id="attachment_10480" align="aligncenter" width="300" caption="1 Day Vix vs SPX from Bloomberg"][/caption]


Today is a fairly important day for determine in the near term what this correction has in store for us as we head into Q1 earnings that start in earnest next week.  Not to sound like a broken record, but keep an eye on the DAX as we head into their close.   The index was outperforming all European indices as of an hour ago and now down the day, off about 1%.

MorningWord: 4/11/12:  It only took about 100 days for the SPX to book it’s second down day of more than 1.5% this year.  Talk about orderly, and even yesterday with the VIX up 8.4% after the previous day’s melt up it didn’t seem like fear was abound.  There is an obvious underlying bid to equities (specifically in the U.S.), it could have something to do with the Fed’s intended goal of keeping rates really low, for a really long time, the yield on the 10 yr is back at 2%, so most money managers continue to ask themselves; where the heck else am I going to put my cash??

Fears of a resurgent debt crisis in Europe have been permeating the markets for the last few weeks, and fairly quietly, European equities had been showing this strain, as of yesterday’s close the DAX was down about 8% from the March high, while Deutsche Bank a decent proxy for the health of Euro Zone financial services was down about 17% from it’s March highs.  

The other big worry among investors was the rate growth deceleration in China, and this one has been a bit tougher to pin down.  The Shanghai Composite has clearly lagged most large equity indices, only up about 5% ytd, but taking a closer look at some U.S. multinationals that are very levered to the “global growth” trade like CAT was likely telling you all you needed to know.  CAT as of yesterday’s close was down 14% from it’s all time high made in February.

These were some of the inputs that have helped frame my near-term bearish thesis, but by no means am I doing a victory lap after a mere 4% sell-off over the last week in the SPX.  I was clearly early and as I have stated in this space on numerous occasions I usually always will be, which is why it is important to continually question your trading/investment thesis.

Overnight some earnings news from AA and specifically their comments about China could be a sort of “canary in the aluminum mine” so to speak for those looking for a “hard landing” in China.  AA beat fairly subdued estimates last night but sited increased demand for aluminum from demand from China, where they expect 11% consumption growth in 2012 after recording 15% growth in 2011.  The stock was lagging the broad market ytd only up about 7.75%, but off about 15% from the 2012 high made in February.  Clearly investors were treating the report with a bit of suspicion.  The stock is up about 5.5% in the pre-market which is basically inline with the implied move from the options market……but AA’s ability to hold the gains today should tell us something about investors appetite to wade back in the water after this last weeks little sell off.

On the flip side, NOK is down about 15% in the pre-market making new 14 year lows on what can only be labeled as a disaster of a quarter.  The company will disappoint on sales, margins units and probably a bunch of other metrics.  The company sited “Cited “competitive industry dynamics” impacting net sales in both Mobile Phones and Smart Devices unit, as well as gross margin declines in Smart Devices unit”    Yeah I think we can just use 2 words to answer the reasons for NOK’s woes, iPhone and Android.   More importantly keep an eye on MSFT, as they have pinned much of their Smartphone strategy going forward on NOK’s lame hardware through a broad reaching partnership.   I think it is fairly safe to say that NOK’s disappointment has little to do with Smartphone Demand and much to do with share-loss to better positioned competitors.  But earnings cross currents none the less.

As for today’s trade, yesterday I updated some of my short biased positions (here) and suggested that I would likely trim a few on such a big down day, but generally sticking with most.  With the futures bouncing this morning things could set up for a slight disappointment.  If I were coming in Long I would much prefer that the market open lower after the last 4 days weakness rather than opening up.  I am going to keep a close eye on the DAX into mid-day as we are likely to trade with Europe, at least into their close.  I will definitely sit tight with existing shorts, but will also take a shot on the short side through index etfs after the open and play for a re-test of yesterdays lows of about 1357 in the SPX.  At this point we should then be focused on the March low of about 1340, which should serve as good support.  This is the level where I will take off most shorts and actually look to play for a bounce (yep I said it).


MorningWord: 4/10/12: The 4 day, nearly 3% sell off from the intra-day 52 week high made last week has been in a word, Orderly.  Even yesterday, with Europe closed, when they had the opportunity to get a little sloppy, the underlying bid remained, and before 3:30 or so it appeared that the SPX would close on the highs of the day.   Frankly the first and last 30 mins of the day, were really the only moments with any resemblance of uncertainty.

The so called “fear index”, the VIX, popped more than 12% yesterday, on what seemed like a sell-off that lacked a ton of “fear”, but the pattern of early to mid month pops maybe one to take a closer look at as market participants try to gauge the potential for a meaningful re-tracement of the SPX’s ytd move.

4 Month VIX chart from Bloomberg

The chart above shows a series of lower highs and lower lows in the VIX, dating back to the Mid-December move of above 30, which also corresponds to the SPX’s last real test of the 1200 level that had served as an important technical level that served as support and resistance at different times throughout much of 2011.  On each of the lower highs made in Mid Jan and Feb, and then early March, all were met with a lower low within a matter of days if not weeks.  What will the Early April Vol spike bring?  In each of the last 3 spikes we were coming from higher levels in the VIX, where market participants were still struggling with last years Volatility regime and trying to figure out what this year would be like…..March sucked the life out of Spot Vix and after being at such depressed levels (15 or below) for weeks it only makes sense to get a bit of reset higher.

This is all happening as we head in Q1 reporting season, and while I am fairly certain that a solid Q1 is in most stocks here, forward guidance will be the key to the markets ability to maintain current levels.  I am in the camp that thinks that visibility should be poor, and with many stocks up 20 or even 30% ytd, I don’t really see the upside for most companies to give overly optimistic outlook’s just to maintain stock performance.  If I were a C -level executive at a company whose stock was up 50% from the Oct lows and maybe up more than the market at this stage of the year and the rally, I would look to be cautiously optimistic with guidance so to not set up for un-expected disappointments later on in the year….but lucky for all you I am not.

SO the risks to me at this stage of the game lie in expectations, not what has happened in the past.  If the market continues to sell off into Q1 earnings which get started this week, but the bulk come in the next 2 weeks than I would say that expectations have been tempered, but if we resume the rally and are pressing against new highs in a week than I would say there is serious disappointment risk.

As for my trading, I have been sitting on my hands net short, and not pressing down openings which has seemed to be the right strategy.  The next big down day of 1% or more I will look to take some profits on shorts.  

Bonus: Last night I saw Bruce Springsteen at MSG in NYC and it rocked…..a clip from my view of a Rarely Played cover; Trapped.  Enjoy, I did!


MorningWord: 4/9/12:  This morning will mark the 3rd consecutive lower opening for U.S. equities in so many sessions, and the first time this has happened all year.  While most global equity markets were closed Friday in observance of Good Friday, the weakness we saw in Asia overnight was a bit of a delayed reaction to the weaker than expected U.S. Jobs report issued Friday morning and inflation data in China that was hotter than expected.  European markets are still closed today and I think it is safe to suggest that they would likely be down in sympathy with our  futures which are weaker by about 1% as of 9am.  

Today’s opening is going to be a bit tricky for those looking to press the short trade, especially with European markets closed, largely because U.S. equities have been perceived as a flight to quality as we have gotten weaker data from Europe and China.  So today’s action will be an interesting test to the wills of U.S. equity bulls, on a day that could see light volumes as market participants limp back from Holidays and with no clear direction from Europe.  I remain net short, specifically in the 2 best performing sectors from last quarter, Tech and Financials, but I am starting to wade into the water a bit with large retailers like WMT (taking a hard look at HD) where they may have all but factored in a full blown economic recovery.

So my plan for today is to NOT press the down 1% opening, and look to short the first rally with a tight stop.  Here is the thing, if they can’t keep them down then we know where they are going, especially after 3 days of orderly weakness.  Just because we got used to 2-4% intra-day swings last year in reaction to bad news does not by any means suggest that this is how any meaningful sell off will happen this year. It could be a slow grind and this will take some concentration for the shorts, there will be fits and starts, not likely to be down in a straight line.  While I might have been early in a few shorts like WMT, IBM, MSFT, KO, NKE and CRM but these are all starting to work now and I want to be patient and let some things play-out.  When trying to pick tops I usually resort to using options rather than stock because I can define my risk, in names that have a tendency to become increasingly whippy at highs, and this is not the sort of risk I want to manage, especially when I kind of know that the position is likely to go against me before it starts to work…..define my risk and risk what I am willing to lose.

I remain net short and cautious as we  head into Q1 earnings seasons, but I recognize the definite potential for squeezes that come from sellers lack of commitment or exhaustion.  Make no mistake about it, the “jury is still out” on whether we are back in a full fledged Bull Market or whether we will re-trace a bit of the recent rally off of the Oct lows.  I obviously don’t have a clue about what will likely happen, just what I think would make sense, and that would be a little fear put back in the generally complacent views towards owning risk assets.

MorningWord: 4/5/12:  

9:20AM: Jobless claims fall to the lowest levels in 4yrs, while this news doesn’t come as a huge surprise, the markets reaction on a holiday shortened week could.  S&P futures got a tad of a lift off of the data, but the DAX has not, and is still down 90 bps on the day.  So the real question longs have to ask themselves is what is “IN” the market at current levels? Have we gone from a glass half full to a glass half empty scenario?  U.S. data continues to show incremental improvement, while Europe is soft and Asia is generally mixed.  Over the long weekend I am sure we will hear all those self-serving mutual fund A-holes who want you 100% invested in stocks suggest that the U.S. economy is about to do what it has never done before and “de-couple” from Europe and China.  Obviously you know where I stand on this, and the truth is, U.S. equities are probably a decent buy with the SPX btwn 1300-1325, my sense is that we will have that opportunity in the coming months if Q1 earnings are inline to slightly worse and Q2 guidance is a bit guarded.

The easy money has been made this year, and while correlation reached historic levels in the last 12 months, we may be entering a period of haves and have nots.  A quick example of this would be SNDK down almost 10% ytd after this weeks pre-announcement and the SOX  and INTC up about 15%.  Or MSFT up 20% ytd and GOOG down almost 2%, I use these big cap tech examples as tech was the one of the best performing sectors in Q1.  So as the next 9 months may not be the layup like the last 5 months, investors may need to roll up their sleeves a bit and do a little old fashioned stock picking.

So for today I want to wait for the first rally and then lay into it on the short side with index etf’s, but keep a tight stop, don’t want to be selling a low here after a 2.5 day sell 0ff.  A good level to attempt this maybe unchanged on the day or up a bit above 1400.

8AM: Yesterday’s price action in U.S. equities was fairly orderly (despite being the second worst daily performance of the year) with the SPX trading in about a 65 bps range after the markets initial gap lower, and closing about 5 points off of the lows.  Many (including me) who were looking for a confirmation of a topping out, leading to a sustained sell off, should be mildly disappointed as there was clearly a bid underlying the weakness.  

2 day SPX chart from Bloomberg


As I stated yesterday afternoon post close, our equity markets, despite their relative under-performance ytd to European indicies like the DAX, still massively out-perform since the start of 2011 and are most definitely treated with a certain “flight to quality” on down days.  The DAX closed on its lows almost down 3% and continues to make lower lows with the index down 90bps as of 8am eastern time.

3 day chart of the DAX from Bloomberg


I am focussed on the strongest market in Europe, that is also perceived to have the strongest Economy as most market participants feel that recessionary pressures out of the regions new found austerity, aside from an economic slowdown in China, pose the biggest risk to our delicate economic recovery.  I think it is important to note that the DAX is now down about 7% from the 8 month highs made in mid March, and below it’s 50 day moving average for the first time since December.  This break in Momentum as we head into Q1 earnings season could be problematic as we stare down the sights of the month of May which has been slightly problematic over the last 2 years for equities (remember Flash Crash in 2010 and the market top in 2011).

1 yr DAX chart from Bloomberg


As for today’s action, and coming in short,  I would have much prefereerd an up opening, and who knows we may still get it when we get the Jobs data at 8:30am, this will be the real test how react to what is expected to be positive news.  Check back before the open for my set up for the day.

I will add on a bit more of a micro note, that stocks like MSFT which is the 4th largest weighted name in the SPX which has had a monster run this year appear to have topped out and is on the cusp of breaking down and establishing a new lower range.  The chart below of the last 30 days shows an obvious head and shoulders pattern with the neckline at $31.  The stock is up 20% ytd but about 6% off of the mid march high.  SO the broad market continued to go up while initial leaders like MSFT stopped going up, thanks a lot AAPL.  I am just saying, the rally was narrow and was getting narrower.

30 day MSFT chart from Bloomberg